On the earnings front, is Albemarle stock worth buying, selling, or fairly priced?

Albemarle ALB expects to release its third-quarter earnings report on November 6. Here’s Morningstar’s take on what to watch in Albemarle’s earnings and stock.

Key Morningstar Metrics for Albemarle

Earnings publication date

• Wednesday, November 6, after trading close

What to Watch in Albemarle’s Q3 Earnings

• Spot lithium prices fell in the third quarter. Albemarle typically sets its prices one-quarter behind spot prices, so we’ll see how that impacts the company’s realized prices.
• Albemarle is ramping up construction of several new lithium production assets. As a result, the company faces a temporary increase in unit production costs as it continues to operate new plants at lower capacity utilization levels. We’ll be looking to hear from management on how the ramp-up is progressing and how it impacts margins from a cost perspective.
• Amid cyclically low lithium prices, Albemarle is delaying growth projects and cutting corporate spending, and the company recently restructured its senior management team. We’ll see if he announces further cost or capex cuts to drive positive free cash flow in 2025-26.

Albemarle Fair Value Estimation

Given the 5-star rating, we believe Albemarle shares are significantly undervalued compared to our long-term fair value estimate of $225 per share. We assume that the weighted average cost of capital is approximately 10%. We use a mid-cycle EBITDA multiple of 11.5 to estimate free cash flows generated beyond our 10-year explicit forecast horizon.

Lithium will remain Albemarle’s largest business. We expect lithium prices to remain at cyclically low levels into 2024. Spot lithium carbonate prices, typically a leading indicator of contract prices, are currently around US$12,700 per metric ton (based on published indices), up from US$75,000 at the end of 2024. 2022: Prices fell as lithium purchases slowed after inventory drawdowns. However, as demand growth remains strong, we expect prices to rise in 2025.

Learn more about Albemarle’s fair value estimate.

Economic moat ranking

We give Albemarle a narrow moat based on its strong and long-term cost advantage in lithium and bromine production. Around the world, lithium carbonate is produced either by the cheaper evaporation of brine or by the more expensive extraction of spodumene minerals.

Albemarle has a cost advantage in lithium carbonate production due to its profitable brine assets at Salar de Atacama in Chile, which produces lithium at the lowest cost in the world, excluding royalties. The company’s dominant position in bromine mining is driven by its low-cost, long-lived assets in the Dead Sea and Arkansas. Production costs are largely determined by concentration, since higher concentration means less water must be evaporated to produce bromine from the brine.

Learn more about Albemarle’s moat rating.

Financial stability

Albemarle is in good financial condition. As of March 31, management reported net debt to adjusted EBITDA at 2.1 times, slightly below management’s long-term target of less than 2.5. The company plans to invest heavily over the next few years to expand lithium production in both exploration and processing. The company aims to increase its lithium processing capacity primarily through expansion of existing capacity and new spodumene processing plants in China. While this expansion is likely to be capital intensive, it should be cheaper than building new lithium production assets in higher-cost regions such as Australia.

Learn more about Albemarle’s financial strength.

Risk and uncertainty

We assign Albemarle a very high uncertainty rating. The company’s biggest risk is volatile lithium prices. Prices could decline if demand for electric vehicles grows more slowly than expected or if the supply of new low-cost electric vehicles grows faster than demand. New batteries such as sodium-ion may overtake lithium as the preferred energy storage source.

Lithium production could grow faster than demand if producers bring too much supply to the market. In addition, new lithium production technologies may change the cost curve for carbonates and hydroxides. Albemarle faces the risk of default as it ramps up lithium production, which includes production delays and cost overruns.

Albemarle is also subject to political risk, especially in Chile. President Gabriel Boric’s plan to nationalize lithium will see the Chilean government own a majority stake in all projects. If this happens, Albemarle may be forced to sell a 50.1% stake to the Chilean government at a price equal to the book value of the assets to extend the lease when it expires in 2043.

Learn more about Albemarle’s risks and uncertainties.

ALB Bulls speak

• Albemarle has leading lithium assets through its brine mining operations in Chile and hard rock spodumene mining operations in Western Australia, one of the lowest-cost sources of lithium production in the world.
• Lithium prices should remain well above marginal cost of production until at least the end of the decade, leading to excess profits and return on investment for Albemarle.
• Albemarle produces inexpensive bromine from highly concentrated brines in the Dead Sea and Arkansas.

ALB Bears say

• Lithium prices could fall and remain lower for an extended period as new supply growth outpaces demand, negatively impacting profitability. Albemarle’s plans to increase lithium production capacity will prove cost-destroying as prices fall.
• Albemarle’s bromine business will decline due to weak demand for flame retardants as consumers switch from computers to less bromine-consuming tablets and smartphones.
• Chile’s plan to nationalize lithium could result in Albemarle being forced to sell a majority stake to the government at a price close to its assets’ book value, wiping out shareholder value.

This article was prepared by Sohoeun Note.